A Competitive Enterprise Institute paper (cowritten by Hans Bader and John Berlau) argues that part of Sarbanes-Oxley violates the Appointments Clause ("[The President] shall nominate, and by and with the Advice and Consent of the Senate, shall appoint . . . [all] Officers of the United States . . .: but the Congress may by Law vest the Appointment of such inferior Officers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments."):

The Sarbanes-Oxley Act of 2002 created a powerful quasi-private agency to oversee the auditing of American business, the Public Company Accounting Oversight Board (PCAOB). . . . Congress gave the power to appoint the members of the PCAOB not to the President, but to the five members of the Securities and Exchange Commission. This method of appointment violates the Appointments Clause in numerous ways. The Appointments Clause gives only the President the power to appoint the nation's principal officers, and allows low-ranking officers to be picked only by the President, a court, or by a single head of a cabinet-level department. The five commissioners of the SEC, as a group, don't fall under any of these categories.

Above all, the authors conclude, the Appointments Clause violation creates a lack of accountability for rules that hurt businesses and don't help investors. They note that England's abuses with offices spawning more offices led the Constitution's Framers to take great care to ensure that the power to appoint was limited to the very top officials of the Executive Branch. . . .

I know a bit about the Appointments Clause, but I'm no expert on the subject; and I know nothing about Sarbanes-Oxley. My sense is that the main questions would be (1) whether the PCAOB members are "inferior officers," and (2) whether the SEC board qualifies as a "head of department." (The notion of plural agency heads is familiar in modern legalese, though it might have been outside the contemplation of the Framers, who I suspect neither anticipated independent administrative agencies nor even non-independent departments who would be run by a board rather than by an individual.) The test for question 1, I believe, is whether the appointee "exercis[es] significant authority pursuant to the laws of the United States," and to answer that one would need to know both the precise powers of the Board, and the caselaw defining what's "significant."

Nonetheless, despite my massive gaps in knowledge here, my colorability antennae (or would it be colorability cones?) are giving me positive signals here -- whether or not it's a winning argument, it seems at least a plausible and interesting one. I'd love to hear what people think about, but please comment only if you're knowledgeable about the Appointments Clause caselaw, about the nature of the PCAOB, or about both. For the purposes of this discussion, I'm much interested not in what the structure of our government or of our accounting industry should be (so no arguments, please, that the SEC is just plain unconstitutional from the get-go), but rather in whether the PCAOB appointments method is indeed unconstitutional under current law.

Opens an interesting can of legal worms, and may even tie to the debate about inherent Presidential power.

Is the power delegable? (All agencies run on delegation -- statutes commonly say the Secretary has the following powers, so he just delegates them to lower officers, who delegate them still lower, and so on). If so, why did the framers bother to enumerate heads of departments as appointing authorities, why not just say the President and be done with it -- if he wants to delegate to the head of a department, he can do so.

If nondelegable -- almost all hirings have been unlawful for decades. I doubt heads of departments hire anyone. Even for the highest posts under them, White House personnel dictates the choice. I know one Sec. of Interior who was started to find he couldn't even have the Solicitor (3d ranking official in the dept) that he wanted. Needless to say, the majority of employees are hired under the civil service rules. The middle level (in my case, attorneys) are picked by the office. High level, political appointees, are dictated by WH Personnel.

The independent agencies, such as the one here, pose their own problems... now, IF the power is delegable, then the President can delegate it to the commissioners, whom he did appoint. But if not...

"exercis[es] significant authority pursuant to the laws of the United States," and to answer that one would need to know both the precise powers of the Board...

The PCAOB regulates the public accounting firms. In particular, any public accounting firm that wants to audit the financials of a public company must be registered with the PCAOB (which entails signficant oversight by the PCAOB of how the firm conducts its auditing responsibilities). In essence, the PCAOB has ultimate power over KPMG, E&Y, PwC, and D&T (and other smaller auditing firms), since if the PCAOB deregisters the firm, the firm could no longer audit public companies. If you think about how much power that is, remember that Arthur Andersen imploded because, once indicted, it could no longer audit public companies.

Eugene: I haven't looked at Sarbanes-Oxley, but I imagine the argument is that the PCAOB is not an "office" at all, and thus the predicate for the Appointments Clause is not met. On this question, see generally Section II-B-a of http://www.usdoj.gov/olc/delly.htm; and Neil Kinkopf's article, 50 Rutgers L. Rev. at 341-345.

PCAOB is different from the independent counsels upheld in Morrison v. Olson.

Independent counsels are picked by a court, one of the three authorized entities authorized to make appointments by the appointments clause (the three being the president, the courts, and Heads of Departments).

PCAOB members are picked collectively by the commissioners of the SEC, as a group. The SEC isn't the president or a court, so it must, at best, be a department. Only Heads of Departments can appoint.

And the SEC has a head: its Chairman, who has managerial and internal-appointment authority that other SEC members lack.

The other Commissioners are not its Head. So they can't collectively make appointments.

Note that appointments only have to be made pursuant to the appointments clause if they involve officers of the United States -- i.e., those exercising significant authority -- not low-level agency employees, so the appointments clause doesn't require that the agency head pick the janitors. Thus, it doesn't invalidate the modern administrative state or result in the "Constitution in Exile."

And only "principal" officers have to be picked by the President. "Inferior officers" (like independent counsels) can be picked by a Head of Department or court.

The Supreme Court likes the Appointments Clause, and struck down federal action under fairly recently, as in the 1995 Ryder case.

So it's not some relic of the 18th Century that died during the New Deal. It's very much alive, and even liberal justices like Blackmun were willing to enforce it.

I agree that a statute can't make something "not an office" for Appointments Clause purposes simply by saying so. But it's also not sufficient to say that it's a federal entity created by statute (as in Lebron). One still needs to go through the constitutional analysis distinguishing "offices" from other federal entities.

Yeah, I agree that that is one of the things that Section 101(b) is getting at.

But a position doesn't have to be formally denominated an "office" to be subject to Appointments Clause analysis.

I don't think the tribunals in Freytag (1991) or Ryder v. U.S. (1995) were expressly characterized as "offices" (although I am operating from memory here) but they were nonetheless subjected to Appointments Clause scrutiny, and the adjudication in Ryder was nonetheless invalidated for failure to comply with the Appointments Clause.

Much could be said here, but lacking time, I will just mention that the paper is oblivious to the actual method being used by the SEC. It's very elaborate but involves the Chairman selecting the final candidate and submitting him or her to the other Commissioners. While the full Commission gets a veto, the actual appointment is by the Chairman

Jist to clarify: Frank Cross is suggesting that even if the PCAOB is an "office," its members are "inferior officers" and properly appointed by the "Head" of a Department -- the SEC Chair. (I suppose it's also possible that the SEC Commission is the "Head" of the SEC -- I haven't examined the question.)

The Independent Counsel provision was upheld in Mistretta because the Counsel was deemed to be an inferior officer, and thus Congress could choose to have appointment by the judiciary. Congress can also choose to have appointments by the heads of departments. I believe that in Freytag, the Court interpreted this term very narrowly, and so it would be a close question whether the appointment provision here is valid.

On whether the members hold an office at all, see not just the Clinton OLC opinion, but the Reagan/Bush OLC opinions that were rejected in the Clinton opinion. Buckley v. Valeo is ambiguous on the point.

On whether, assuming they are officers, they are "inferior," aside from Morrison v. Olson, the key case is Edmund v. US (1997). Good luck reconciling Edmund and Morrison, as Edmund (Scalia writing for the Court) says that, in order to be an inferior officer, you "generally" have to be subject to direction and supervision at some level by a superior officer below the President, while Morrison says that the independent counsel, who was subject to no effective direction or supervision by a superior, was an inferior officer.

I'm working on this slowly but surely, but given the fast flow of comments, it appears that moving slow and steady on blogs does not seem to win the race LOL. So here's a quick thought to put in right now:

There is a concern raised about Freytag regarding how the tax court was characterized in the statute. Here, from Justice Blackmun's majority opinion, is the information:

By the Tax Reform Act of 1969, 951, 83 Stat. 730, 26 U.S.C. 7441, Congress "established, under article I of the Constitution of the United States, a court of record to be known as the United States Tax Court." It also empowered the Tax Court to appoint commissioners to assist its judges. 958, 83 Stat. 734. By the Tax Reform Act of 1984, 464(a), 98 Stat. 824, the title "commissioner" was changed to "special trial judge." By 463(a) of that Act, 98 Stat. 824, and by 1556(a) of the Tax Reform Act of 1986, 100 Stat. 2754, Congress authorized the Chief Judge of the Tax Court to appoint and assign these special trial judges to hear certain specifically described proceedings and "any other proceeding which the chief judge may designate." 26 U.S.C. 7443A(a) and (b). The Tax Court presently consists of 19 judges appointed to 15-year terms by the President, by and with the advice and consent of the Senate. 7443(a), (b), and (e).

The questions about whether vesting appointment of PCAOB members by the SEC's Commissioners collectively really produces different results than if they were picked by the SEC's chairman, and whether the SEC's Commissioners can collectively qualify as its "head," for purposes of appointments permitted to be made by the Head of a Department, are very thought-provoking.

But the SEC's Chairman has administrative powers, and powers over the appointment of SEC staff, that his fellow commissioners lack, and his greater authority in those areas is not offset by anything else that would make him their equal (for example, he is not removable by them).

And a GAO report discussed in the above-cited paper tied the abortive first selection of the PCAOB's chairman (of William Webster, who resigned when his past service on the board of a company that was embroiled in an accounting scandal) to the fact that nobody, not even the SEC's chairman, was really in charge of vetting PCAOB members -- something presumably aggravated by the collective manner of appointment of PCAOB members.

After that fiasco, the SEC has apparently sought, in practice, unanimous agreement among the Commissioners as to appointments. That kind of collective appointment process, and veto power by commissioners, is likely to lead to at least some different selections than if appointments were made by the SEC's chairman.

It's different from independent counsel statute because the Appointments Clause permits collective appointments by judges (since it permits "courts," generally multimember bodies, to appoint inferior officers such as independent counsels) but permits departmental appointments only by the "Head" of a Department (something that logically means an agency's secretary or chairman, at least when the Secretary or Chairman has powers that other agency managers lack -- as is the case for the SEC. I can see a contrary argument for departments whose nominal heads are removable at will by an agency's board, such as the Postal Service Board of Governors).

I think you are defining "head" in a Clintonian fashion, that is, too narrowly. There is no reason why "Head" could not be a mass noun; after all, the Constitution refers to the President is described as "He," and that does not seem to be preventing Hillary Clinton from running.

Mr. Bader and Mr. Berlau's entire Issue Analysis of Oct 4, 2005 is very instructive on this issue about the PCAOB and the Appointments Clause (which can be found as a PDF under "Tools" on the web site that Prof Volokh linked to). Based on the arguments found in the Issue Analysis, it appears to me that the first question Prof Volokh raised re principal officers vs. inferior officers is unclear, but ultimately does not need to be decided because (to quote from the paper):

If the PCAOB's members are principal officers, then their appointment is plainly invalid given their failure to be nominated by the president and confirmed by the Senate. But even if the members are found to be "inferior officers," their method of appointment is still unconstitutional. This is because Congress has vested the appointment power for the PCAOB very likely in an inappropriate agency and certainly with the wrong officials in that agency.

Mr. Bader and Mr. Berlau quote from Freytag v. CIR, 501 US 868, 886-87 (1991); that quote quotes United States v. Germaine, 99 U.S. 508, 510-11. In Footnote 32 (which is very instructive) of their Issue Analysis, Mr. Bader and Mr. Berlau write:

In a footnote, the Court left open the possibility that a list of "principal agencies," including the SEC, might conceivably qualify as "Department" for purposes of the Appointments Clause despite their lack of cabinet-level status. See id. at 887 n.4. But as we explain below, even if the SEC qualified as a Department, no one at the SEC could make appointments other than its "Head," the Chairman. That is not how PCAOB members have been selected.

This leads to the question Prof Volokh mentions in his original post -- can a "head of department" be an entire commission, rather than just the Chairman of the Commission? That question will be addressed later (so as to get this posted in a semi-timely fashion).

Even if the SEC's Commissioners, rather than its Chairman, were collectively its "head" (itself a hotly debated proposition), and thus could qualify as the "Head of Department" authorized to pick officers by the Appointments Clause, the SEC would still need to constitute a "Department" for Appointments Clause purposes to have the authority to pick officers.

And as Craig Oren notes above, there is dictum in the 1991 Freytag case that suggests that only cabinet departments, not independent agencies like the SEC, can qualify as "Departments" with appointing authority under the Appointments Clause. (Although there is admittedly a contradictory footnote in that very same case that leaves open the possibility that the principal independent agencies, despite not being cabinet departments, might also have appointive authority.).

As the reader can see, there are lots of ambiguities about how the Appointments Clause applies. But only a tiny fraction of those ambiguities need to be resolved against the PCAOB for it to be invalidly appointed.

Because the language of the Twenty-fifth Amendment does not bind our interpretation of the Appointments Clause, the fact that the Amendment strictly limits the term "department" to those departments named in 5 U.S.C. 101 does not provide a similar limitation on the term "Departmen[t]" within the meaning of the Appointments Clause. We do not address here any question involving an appointment of an inferior officer by the head of one of the principal agencies, such as the Federal Trade Commission, the Securities and Exchange Commission, the Federal Energy Regulatory Commission, the Central Intelligence Agency, and the Federal Reserve Bank of St. Louis.

First of all, the SEC has authority to set accounting rules for public companies, pursuant to the securities laws. It has this authority pursuant to its ability to require the reporting of specified financial information in reports filed by those companies with the SEC. For many years, the SEC delegated the authority to define reporting (i.e., accounting) standards to the AICPA as a self-regulatory organization. Only on rare occasions did the SEC overrule the AICPA, but it did happen from time to time. In the opinion of many, including me, the AICPA has been a captive of the profession it is supposed to regulate for many years. (I may be considered biased by some due to my position [which I'm not going to specify here], so if you choose to disagree, that's fine by me.)

The PCAOB was established by Congress to supersede the AICPA as the setter of accounting and auditing standards after it became clear that the AICPA had failed to address a number of key issues regarding accounting and auditing standards for public companies. Standards set by the PCAOB are still subject to the authority of the SEC to overrule or modify. The AICPA still has authority to set standards relating accounting for and auditing of nonpublic companies. In the accounting profession, the two potentiall different standards are referred to as "big GAAP" (GAAP: Generally Accepted Accounting Principles)and "little GAAP." Arguably, they should be no different in practice, but conceivably they could be.

Notice how in Note 4 of Freytag (cited above in my post 2.6.2006 1:12 pm), Justice Blackmun even writes: "appointment of an inferior officer by the head of one of the principal agencies, such as the Federal Trade Commission, the Securities and Exchange Commission, the Federal Energy Regulatory Commission, the Central Intelligence Agency, and the Federal Reserve Bank of St. Louis."

The phrasing of that footnote in Freytag, along with the list of agencies named (e.g., the CIA), implies that Justice Blackmun's approach would correlate with what would probably be an originalist approach to the word "head," i.e., thinking of an individual (viz., the Chairman) as the "head" of a principal agency, not all of the commissioners comprising a "head." As Mr. Bader and Mr. Berlau point out in their Issue Analysis, "the SEC Chairman has substantial administrative authority that the other Commissioners lack. Moreover, it is the Chairman who appoints the SEC's personnel, confirming that he is more than the Commission's nominal leader." It is consistent with the structure of the SEC to hold that the Chairman is the "head" of the SEC.

Furthermore, recall that in Freytag it was the Chief Judge of the Tax Court (and not the entire Tax Court) who appointed the special trial judges. It would appear that ruling that only the Chairman of the SEC could appoint the members of the PCAOB would be consistent with Freytag in that respect.

Abstract: Mr. Bader and Mr. Berlau's Issue Analysis of Oct 4, 2005, provides an excellent rationale as to why the method of appointing the PCAOB members as provided in Sarbanes-Oxley is unconstitutional. It appears to me that that first question Prof Volokh poses (as to principal vs. inferior officers) is difficult but yet need not be decided because it appears that the SEC board of commissioners is not a "head of department"; rather, the SEC Chairman is the "head" for purposes of the Appointments Clause. Freytag v. CIR, 501 US 868 (1991), is consistent with this analysis.

It would appear that ruling that only the Chairman of the SEC could appoint the members of the PCAOB would be consistent with Freytag in that respect.

Yes, and ruling that the Chairman or a board that is a head would be consistent with Freytag too. The decision sets the ground rules for sufficiency, but does not exclude a broader interpretation. That is precisely what the footnote leaves open. You are wrong.

With all due respect JackJohn, I never said that Freytag excludes the other approach. I simply am positing what you concede -- namely, that ruling that only the Chairman of the SEC could appoint the members of the PCAOB would be consistent with Freytag. Freytag alone is not sufficient to rule that only the Chairman of the SEC can be a "head of department." But given other contours of the way the SEC functions, along with the phrasing in Freytag, one can draw such a conclusion.

I'm sorry I'm not making my point clear to you. The independent counsel case was easy on the Appointments point. because the Constitutional text clearly allows Congress to assign the appointment of inferior officers to the judiciary, and the statute had the special counsel appointed by the D.C. Circuit. The Constitutional text says that Congress can allow appointment of such officers by heads of departments, but there is considerable ambiguity about what constitutes such a head. I agree that multiple interpretation of "heads of departments" are possible, but it's not clear that the Court would adopt one that would allow the statute to be upheld. hope this makes my point clearer.

BTW, much of the argument here assumes that the folks appointed by the SEC are "inferior officers." Possibly one could argue they are principal officers like, say, the commissioners of the SEC. The fact that the SEC commissioners appoint them indicates, but does not itself prove, that they are inferior.

I agree with you Professor Oren regarding the differentation between this PCAOB hypothetical and Morrison v. Olson. The ambiguity of what constitutes a "head of department" is why it is not, in my opinion, "activist" to construe that a "head of a department" must be a single person. Originalism, governmental structure (i.e., the structure of the SEC), and stare decisis very well might lead one to such a conclusion. Of course, ruling that the members of the PCAOB are principal officers, or ruling that the SEC is not a "department" vis a vis the Appointments Clause, renders answering this question unnecessary.

I also agree with you Professor Oren re the issue of principal officers vs. inferior officers. Yet as even Mr. Bader and Mr. Berlau point out (quoting from Morrison v. Olson), "it is true that the Supreme Court has stated that, 'the line between "inferior" and "principal" officers is one that is far from clear.' " It appears to me, for what it's worth, that the argument claiming that the SEC is not a "department" vis a vis the Appointments Clause is more compelling. Yet (as I write above in previous comments), note 4 of Justice Blackmun's opinion in Freytag leaves open the option of the SEC being a "department" vis a vis the Appointments Clause. Therefore, it seems to me that the argument claiming the SEC Board of Commissioners is not a "head of department" is more compelling than both of the former arguments (as outlined in the Issue Analysis by Mr. Bader and Mr. Berlau).

First, a factual point: the SEC commissioners voted on who was to be the first PCAOB head, William Webster (who later resigned), the Chairman at the time (Harvey Pitt) didn't select him on his own authority. It was a 3-2 vote (with Pitt in the majority). Given that the SEC Commissioners later unanimously selected the PCAOB members, it makes no difference -for the moment--if the "Head" of the SEC is the Chairman, and not its collective Commissioners. Of course, the "Head" issue could matter at some future time, with a different PCAOB board, if the Chairman dissented on who was appointed. The main issues that a court might decide regarding the Appointments Clause are (1) "Is the SEC a Department" capable of making an inferior office appointment; (2) is the PCAOB a federal agency to which this clause applies, even though Congress expressly disclaimed the intention of creating one. The only way I see these issues coming up in a justiciable context is if some accountant is disciplined by PCAOB, the PCAOB affirms the disclipine, and the accountant raises the issue to challenge the ability of th PCAOB to impose this discipline.

Third, Congress modelled the PCAOB on the NASD, a private self-regulatory entity that oversees the brokerage industry, but which is, itself, overseen by the SEC. (The SEC must approve of the NASD's rules and regulations). Thus, one area of guidance might be court challenges to the NASD's rules, operations, etc.

It seems to me that the PCAOB isn't like the New York Stock Exchange (NYSE) or other SRO's, even though the SEC hears appeals of disciplinary actions from the SRO's just as it does from the PCAOB. It's much more exclusively a state-actor, and thus more clearly subject to the constitution, including the Appointments Clause.

Unlike the NYSE, which had a long history of private existence before being incorporated into the SEC's system of oversight, PCAOB was created by an Act of Congress.

And the PCAOB, unlike various SRO's, has its managers exclusively selected by a federal agency, the SEC.

The PCAOB is exclusively funded by federally-enforced exactions and does not do anything other than enforce federal law -- either Sarbanes-Oxley itself or PCAOB rules, the violation of which subjects the violator to criminal sanctions under federal law.

As exSEC attorney observes, there's also the important hurdle of standing for any potential challenge under the Appointments Clause.

It seems to me that the appointments-clause issue would come up in a justiciable context not just if the improperly-appointed PCAOB were to discipline an accountant, but also if it were to subject an accountant to the cost, expense, and professional damage of an investigation.

Indeed, under D.C. Circuit law, a business burdened by increased accounting costs under PCAOB rules might even have standing (see the D.C. Circuit's decisions in Competitive Enterprise Institute v. NHTSA and Chamber of Commerce v. SEC), not just a disciplined or investigated accountant.

Interesting analysis on the Framers' motivation to prevent the multiplication of federal offices. I wrote a law review article a decade ago on the Emoluments Clause in which I referenced the debates at the Constitutional Convention to argue that the Emoluments Clause was not just an anti-corruption provision but one that was designed to discourage Congress from creating new offices or raising the salaries of existing offices (as they would have to wait until the end of their terms before they could be eligible for appointment to an office Congress created or one for which Conmgress increased the salary).

Mr. Bader, your posts (and your Issue Analysis) have been very informative. It sounds as if, in order for a party to have standing in a hypothetical PCAOB case, it is theoretically possible under DC Circuit precedent that the said party need only to have been adversely affected (via increased costs) by PCAOB rules. That is quite interesting. I also agree that it would be the case that an accountant who is the subject of a PCAOB investigation (and thus facing the monetary and social costs of being the subject of such an investigation) would have standing. After all, as Justice Stevens in Newdow notes, "the plaintiff must show that the conduct of which he complains has caused him to suffer an 'injury in fact' that a favorable judgment will redress." Elk Grove Unified School Dist. v. Newdow, 542 US 1 (2004).

For many years, the SEC delegated the authority to define reporting (i.e., accounting) standards to the AICPA as a self-regulatory organization. Only on rare occasions did the SEC overrule the AICPA, but it did happen from time to time. In the opinion of many, including me, the AICPA has been a captive of the profession it is supposed to regulate for many years. (I may be considered biased by some due to my position [which I'm not going to specify here], so if you choose to disagree, that's fine by me.)

No. GAAP was, until the advent of the PCAOB, promulgated by the Financial Accounting Standards Board ("FASB"). The AICPA promulgated Statements on Auditing Standards ("SASs", which are notthe same thing.

As long as we're griping about the lack of self-enforcement, state bar associations -- which are supposed to regulate the conduct of attorneys -- are just as ridiculously beholden to attorneys as the AICPA is to CPAs.

No. GAAP was, until the advent of the PCAOB, promulgated by the Financial Accounting Standards Board ("FASB"). The AICPA promulgated Statements on Auditing Standards ("SASs", which are notthe same thing.

As long as we're griping about the lack of self-enforcement, state bar associations -- which are supposed to regulate the conduct of attorneys -- are just as ridiculously beholden to attorneys as the AICPA is to CPAs.

KevinCA,

Thanks for the correction and clarification. I'm not an accountant, I just . . . uh, deal with them from time to time, usually on an unpleasant, adversarial basis. The point is that previous standards were set subject to SEC oversight. Now the PCAOB sets standards subject to SEC oversight.

The PCAOB is not really in any different position than FASB was vis-a-vis the SEC, except that it has less autonomy in choosing managing personnel.

You get no argument from me concerning at least some state bar associations, not to mention the American Bar Association. At least occasionally, there are incredible whitewashes of egregious misconduct, especially by large-firm lawyers. I quit the ABA on account of that ten or 15 years ago.

Here is a clarification on the PCAOB appointment process that the SEC follows.

First, contrary to frankcross' posts, it is by vote of all five of the Commissioners, not simply by the Chairman. The SEC Commissioners have held open (public) meetings, and vote on the nominees. The following are links to SEC releases discussing these votes:

(Goldschmidt statement dissenting from approval of Webster)

(Campos statement dissenting from approval of Webster)

(Statement announcing unanimous selection of William McDonough as Chairman of PCAOB).

I will add that I witnessed some of these votes while an SEC attorney.

Second, after the Webster fiasco, the SEC's Chairman (William Donaldson, Harvey Pitt's successor) announced a vetting process would take place, involving all five Commissioners and members of Congress, etc.
See this link:
. However, he did not promulgate any rules about it, he just announced a new policy, in response to the GAO's report on how the process got screwed up with Webster.

Third, I think it is a stretch to argue, as Mr. Bader does, that the mere fact that the PCAOB can decide who and what to investigate and that this decision is not subject to SEC review, demonstrates that they are "principal" officers of a federal agency who can only be appointed by the President. All PCAOB disciplinary decisions, including the fines and penalties dicussed in Mr. Bader's article, are subject to the SEC's review and reversal In that respect, its decisions are just like those handed down every day by the SEC's administrative law judges, which can and frequently are reversed by the SEC Commissioners upon review.

That said, I enjoyed Mr. Bader's article. I think the thesis is colorable, on some levels.

Feh. The other quasi-governmentals have been around for six or seven decades, and no one's gotten them gone yet. As much as I agree that the PCAOB "should" be struck down on constitutional grounds, we realized that was a loser argument four years ago.

Now, if you see someone who actually has money on the line and the resources to back up their assertions(read "other than a think-tank or an academic") make the argument that PCAOB is unconstitutional, then you can take it seriously.

A quick comment re Jack John's latest post -- While judicial deference is usually a virtue, judicial deference is not a summum bonum. Also, you quoted one sentence from my above post without quoting the sentence immediately following it: "Of course, ruling that the members of the PCAOB are principal officers, or ruling that the SEC is not a 'department' vis a vis the Appointments Clause, renders answering this question [about whether the SEC Board of Commissioners constitutes a collective "Head"] unnecessary."

I agree with exSEC Attorney -- Mr. Bader and Mr. Berlau's Issue Analysis is very thought-provoking; the arguments regarding whether the SEC is a "department" vis a vis the Appointments Clause, and whether the SEC Board of Commissioners can be considered a collective "Head," are particularly informative. It will be interesting to see what cases might percolate as time passes.

This is indeed a fascinating discussion. But like all such discussions, it is not taking place in a vacuum.

Just curious about one thing.

Let's stipulate, for purposes of this post and whatever discussion it may provoke, that Messrs. Bader and Berlau are correct that the process of consituting the membership of the PCAOB is Constitutionally infirm.

Gentlemen, what's your solution?

From my perspective as a practicing tax lawyer who advises publicly held multinational companies on their most sensitive and high-stakes tax issues, and deals on a regular basis with those companies' auditors, I am satisifed that in general the SOX reforms (including, but not limited to, the existence of the PCAOB, and the activities undertaken by the PCAOB to date), are (despite the inaguably high costs of compliance) unabmiguously good for investors. The quality of financial reporting has, in fact, gone up substantially.

So if the point of this exercise is to emasculate SOX by the back door, I am opposed.

Make the PCAOB part of Treasury? Fine. But the arguments for just making it go away, as I understand them based on my experience, simply do not withstand objective scrutiny.

From my perspective as a practicing tax lawyer who advises publicly held multinational companies on their most sensitive and high-stakes tax issues, and deals on a regular basis with those companies' auditors, I am satisifed that in general the SOX reforms (including, but not limited to, the existence of the PCAOB, and the activities undertaken by the PCAOB to date), are (despite the ina[r]guably high costs of compliance) unabmiguously good for investors. The quality of financial reporting has, in fact, gone up substantially.

Of course, at a cost exceeding $1 million in auditing fees and additional inside hours per firm. Exactly how was that a good deal for investors at firms with $10-30 million in revenues? Are you saying that the small firms forced from the market and prevented from making offerings were probably all bad actors, anyways? Granted, now that SOX has closed the capital markets to small public companies, we can all breathe easier that a new wave of entrepreneurs will be excluded from growing into the IBMs of tomorrow...

On SOX compliance costs: many people seemed to forget exactly what is "causing" public companies to spend more on their accounting, i.e., which provision of SOX is responsible. It is the provision that requires auditors to issue a report on the issuer's internal controls, that is included in the company's Form 10-K report. That's it. Before SOX, auditors issued a letter on these controls to management, which did not share the contents of the letter with investors, and typically ignored them. Now, the auditor's report is on display for investors. So, smaller companies, which often have lousy internal controls, are essentially freaking out that investors will find out that their controls are bad, and are, as a result, spending money (by hiring other accounting firms) to fix them. Of course, they don't have to fix them, they can just disclose (via the auditor's report) that their controls are weak. Why do we think this is a bad thing?

Of course, at a cost exceeding $1 million in auditing fees and additional inside hours per firm.

Got any empirical evidence to support that assertion re SOX compliance costs?

Exactly how was that a good deal for investors at firms with $10-30 million in revenues?

That's a good deal because you're no longer investing in a pig in a poke.

Are you saying that the small firms forced from the market and prevented from making offerings were probably all bad actors, anyways? Granted, now that SOX has closed the capital markets to small public companies, we can all breathe easier that a new wave of entrepreneurs will be excluded from growing into the IBMs of tomorrow...

That's not my position. That's your straw man. Got any empirical evidence to support any of those assertions?

Odd that we don't see more tax lawyers become sucessful businessmen.

Non sequitur. And besides, why would I want to give up an intellectually stimulating, highly remunerative career that (at the risk of sounding overly cocky, but I've got the client list to back it up) I'm awfully good at, to be "a businessman" (whatever that means)? Offer me a tenure-track position teaching tax at a national law school, and I'd probably bite -- but I've turned down dozens of opportunities to go in-house, without a moment's hesitation.